state resident credits after the wynne decision
TRANSCRIPT
We bring the experts to you
State Resident Tax Credits after the Wynne
Decision
Presented by
Timothy P. Noonan, J.D.
2State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Introduction
Constitutional Law Basics
Resident Credit Concepts
Wynne: From Start to Finish
Deconstructing the Court’s Decision
Answering Questions
State Resident Tax Creditsafter the Wynne Decision
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Legal and Factual
Background
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Constitutional LawThe Basics
Article I, of 8, clause 3 of U.S. Constitution: The Commerce Clause
Grants Congress power “to regulate commerce … among the several states”
Initial idea
Avoid “Balkinization” that plagued relations among Colonies and under Articles of Confederation
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Constitutional LawThe Basics
The “Negative” or “Dormant” Commerce Clause
Though framed as positive grant of power to Congress, Court has “consistently held this language to contain a further, negative command.”
“Prohibiting certain state taxation even when Congress has failed to legislate on the subject” (Jefferson Lines, 1995)
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Constitutional LawThe Basics
This “negative” aspect has been disputed
In Wynne, Justice Scalia called it a “judicial fraud!”
Also, he said it “has deep roots, like many weeds.”
He also called it the “Synthetic Commerce Clause” and the “Imaginary Commerce Clause”
But it’s not going anywhere
MD didn’t even make the argument!
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The BasicsResident Credits
States generally tax their own residents on all income, regardless of source Residents are taxed on one thing
Nonresidents only taxed on income from in-state sources Wages for in-state services
Income from in-state business
Income from in-state property
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The BasicsResident Credits
Resident Credits
State allows its resident a dollar-for-dollar credit for taxes paid to other states
Can’t exceed tax due in home state
i.e., CT resident at 6.5% tax rate can’t get full resident credit for taxes paid to NY at 8.82%
Often only allowed for source-based taxes in nonresident state
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Resident Credit ExampleMike lives in CT, works in NY and makes $100k/yr
NYS tax - $8,800CT tax - $6,500
less - $6,500 (credit for NY tax, maxed out at $6,500)
$0 Total CT tax bill
Monica lives in CT, works in PA and makes $100k/yr
PA tax - $5,000CT tax - $6,500
less - $5,000 (credit for PA tax)$1,500 Total CT tax bill
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The BasicsResident Credits
Important Limitations
1. Different sourcing rules
— Example: CT will only give credit for taxes paid to other states on income from sources in that state — determined under CT’s sourcing rules!
— Convenience Rule Problem
2. “Unearned” or “Non-Source” Income
— If two states impose tax on a taxpayer’s intangible income (not sourceable anywhere), usually no resident credits
— CT/NY dual residency: prime example
— New Jersey is much nicer!
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Polling Question #1
Do your clients think Wynne is a big deal?
Yes, I’ve received many questions from clients
No, a few questions, no more than any other tax case that’s been in the news
Not at all. Nobody is bugging me about it.
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Wynne BackgroundMD Rules
MD residents (like NY residents) pay tax on their worldwide income
MD personal income tax has two components:(1) state and (2) county
Nonresidents only pay tax on sourced income, but they pay BOTH the state and county tax (called “special nonresident tax”)
Residents only allowed credit against state portion of tax
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Wynne BackgroundFacts
MD residents who held stock in an S corp that operated and filed returns in 39 other states
Reported flow-through income from the S corp on MD income tax returns
Claimed resident tax credit (against both the state and county components) for taxes paid to other states
The MD State Comptroller disallowed credit against county component
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Wynne BackgroundSo Wynnes pay tax to MD as residents (say 6%) and rate includes a county component (say 1%)
They also pay tax in CA at 13% rate
MD will allow an offset for CA taxes paid, but only against the 6% state tax; 1% county tax can NEVER be offset
Constitutional dispute: Is that legitimate? Can a state tax its residents on all income and NOT provide full credit for taxes paid to other states?
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Wynne Background
Stated another way …
Are resident credits a creature of legislative grace and good tax policy?
— or —
Are resident credits constitutionally required?
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Wynne Tax Court Decision
Affirmed the Hearings and Appeals Section’s ruling which held that the no credit was allowed against the county component of MD’s income tax
Tax Court reversed by Circuit Court for Howard County, which held that MD’s tax scheme violated the Commerce Clause
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WynneMD Court of Appeals
DecisionMD’s high court affirmed the Circuit Court
Evaluated MD’s tax under Complete Auto’s four-part test
1. Substantial nexus with taxing state
2. Fairly apportioned
3. Doesn’t discriminate against interstate commerce
4. Fairly related to services provided by the state
Held that MD’s tax violated #2 and #3
State Resident Tax Creditsafter the Wynne Decision
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dormant
Please locate yourAttendance Validation Form
(it should be the 5th page in your Handout Materials)
Keep this form handy!
We’ll have two more attendance
validation items for you to write down
later in today’s webinar.
REMINDER!You can e-mail your questions during
today’s seminar to be passed along to our presenter for response during the Q&A
session -
Send your questions to
Attendance Validation #1
State Resident Tax Creditsafter the Wynne Decision
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WynneBreaking Down the Supreme Court’s
Decision
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The Supreme Court takes on tax cases?
Polling Question #2
All the time
As much as other cases
Very rarely
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On to the Supreme Court?
Petition for Certiorari
Why would the Court take the case?
Renewed interest in taxes?
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Supreme Court Scorecard
Majority: 5 Justices
Alito, Roberts, Kennedy, Sotamayer, Breyer
Dissent: 4 Justices
Ginsberg, Scalia, Kagan
Thomas — separate dissent
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On to the Supreme Court
During Oral argument, Chief Justice John Roberts observed that
“if each State did what we’re talking about, people who work in one State and live in another would pay higher taxes overall than people who live within one State and work in the same State.”
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The Internal Consistency Test
Justice Roberts was talking about the “Internal Consistency Test The Commerce Clause requires that taxes on interstate
commerce be nondiscriminatory and fairly apportioned.
This test is designed to allow us to distinguish between
i. a tax structure that is inherently discriminatory (bad); and
ii. one that might result in double taxes only as a result of two nondiscriminatory state schemes (OK)
Past cases may have suggested that the Commerce Clause was N/A to individual income taxes; the Court laid that to waste
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The Internal Consistency Test
The test: whether interstate and intrastate commerce would be taxed equally if every state were to adopt the precise tax scheme at issue
State A imposes a 1.25% tax on all residents, regardless of where earned
State A also imposes a tax on nonresidents’ source income at 1.25%
No resident credits
April and Bob live next door to each other in State A; Bob’s business located in State B; April’s is all in State A
To apply the I/C test, we have to assume all states have the State A scheme.
State A fails the test!! April Bob
State A Tax 1.25% 1.25%
Hypo State B Tax 0 1.25%
Total Bill 1.25% 2.5%
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Alito Point-Counterpoint
Dissent Point The “difference between taxes on net income
and taxes on gross receipts from interstate commerce warrant different results”
Alito Counterpoint “We see no reason why the distinction
between gross receipts and net income should matter” and in any event “our cases rejected this formal distinction some time ago”
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Alito Point-Counterpoint
Dissent Point The dormant Commerce Clause does not apply
equally to corps and individuals since individuals receive different (more) services and they can vote
Alito Counterpoint Corps also receive state services and a law’s
constitutionality doesn’t turn on whether the challenger can vote
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Alito Point-Counterpoint
Dissent Point States have sovereign power to tax 100% of
residents’ worldwide income and the Commerce Clause doesn’t limit a state’s ability to tax its residents’ income, regardless of where earned
Alito Counterpoint Just because a state has jurisdiction to tax
(under the 14th Amendment’s Due Process Clause) doesn’t preclude a finding that the tax violates the Commerce Clause
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Alito Point-Counterpoint
Dissent Point Because of the credit, MD actually gets less
tax revenue from residents engaged in interstate commerce
Alito Counterpoint The focus is on the total tax burden on
interstate commerce; not whether MD gets more or less tax from a particular taxpayer — it’s a substance over form inquiry
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Alito Point-Counterpoint
Dissent Point MD could cure the internal inconsistency by
eliminating the tax on nonresidents
Alito Counterpoint The existence of a remedy doesn’t render the
tax constitutional
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Alito Point-Counterpoint
Dissent Point The dormant Commerce Clause is “a judicial
fraud”
Alito Counterpoint The doctrine was first applied by Chief Justice
John Marshall’s decision in Gibbons v. Ogden (1824) and has since been applied in dozens of SCOTUS opinions, joined by dozens of Justices
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The Aftermath of WynneCommerce Clause protections extend equally to Taxes based on gross and net income (prior
cases generally focused on gross receipts taxes); and
Both corporations and individuals (prior cases generally dealt with corporations)
Maryland counties to pay more than $200 million in refunds
Consider filing refund claims — in Maryland, and maybe even elsewhere?
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Time to record our second attendance check item on your Attendance
Validation Form
Keep this form handy!
We’ll have one more attendance
validation item for you to write down
later in today’s webinar.
Commerce Clause
REMINDER!You can e-mail your questions during
today’s seminar to be passed along to our presenter for response during the Q&A
session -
Send your questions to
Attendance Validation #2
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Featured Upcoming Program:
Trust Income at the State Level: The Significance of State
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State Resident Tax Creditsafter the Wynne Decision
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Questions, Questions, and More Questions
36State Resident Tax Creditsafter the Wynne Decision
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Questions
Are resident credits now constitutionally required?
Per majority, yes
But only if states also tax nonresidents
Dissenters took a different view, but don’t expect this to change
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Questions
What state resident credit schemes are or could be directly impacted by the decision?
States Wisconsin, North Carolina, Tennessee,
Massachusetts
Local Jurisdictions NYC, Philadelphia, Cleveland, Detroit, Kansas
City, St. Louis, Wilmington (DE), Indiana’s counties
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Questions
Could the MD structure be cured in order to pass the Internal Consistency Test by allowing a resident credit?
State A imposes a 1.25% tax on all residents, regardless of where earned
State A also imposes a tax on nonresidents’ source income at 1.25%
State A provides resident credit for taxes paid to other states on sourced income
April and Bob live next door to each other in State A; Bob’s business is located in State B; April’s is all in State A
April Bob
State A Tax 1.25% 0
Hypo State B Tax 0 1.25%
Total Bill 1.25% 1.25%
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Questions
Could the MD structure be cured in order to pass the Internal Consistency Test by not having the Counties tax nonresidents?
State A imposes a 1.25% tax on all residents, regardless of where earned
State A does not tax nonresidents
No resident credits
April and Bob live next door to each other in State A; Bob’s business is located in State B; April’s is all in State A
But is this fairly apportioned – externally consistent?
April Bob
State A Tax 1.25% 1.25%
Hypo State B Tax 0 0
Total Bill 1.25% 1.25%
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Don’t get lost in the differences between the rules in two states
State A imposes a 1.25% tax on all residents, regardless of where earned.
State A does not tax nonresidents and provides no resident credits (which is internally consistent per previous slide)
But assume State B is a real state; and it does tax nonresidents
April and Bob live next door to each other in State A; Bob’s business is located in State B; April’s is all in State A
The Internal Consistency Test
Be Careful
April Bob
State A Tax 1.25% 1.25%
Actual State B Tax
0 1.25%
Total Bill 1.25% 2.5%
This stinks for Bob. And there is double tax. But NOT because State A’s scheme fails the test; only because of what State B is doing
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Questions
Is all double tax unconstitutional?
No — see previous slide
Double tax OK if the states’ tax schemes are internally consistent
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Questions
Must NYS allow resident credit against NYC personal income taxes for source income in other states?
CA is typical example, since NYC resident with source income pays 13% to CA and only gets credit against 8% NYS tax
No longer can say Commerce Clause n/a to individuals
Unlike MD, NYC doesn’t tax nonresidents
But see slide 9: Fair apportionment?
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Questions
Is NY’s Statutory Residency Test unconstitutional?
Court of Appeals in Tamagni upheld rule; declined to apply Commerce Clause analysis, but said that rule was fine anyway even if it did How does the Wynne rule, that the Commerce Clause
applies to individuals, affect the analysis?
Must a credit be provided for taxes paid to other states in all circumstances?
Different rule for “non-sourced” income?
1995 NESTOA agreement attempted to remedy (see attached article)
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Questions
Is NY’s convenience rule unconstitutional?
Court of Appeals in Zelinsky upheld rule; applied Commerce Clause analysis and said that rule was fine No question about IC test; taxpayer conceded
the rule passed
External consistency was issue
But what about reverse-convenience days?
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Here is the 3rd and FINAL attendance validation for
today’s webinar.
double taxation
Attendance Validation #3
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Please limit your questions to only topics
discussed during today’s presentation.
You can e-mail your questions to
Question and Answer Session
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
CONCLUSION
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Thank You forAttending Today’s
Webinar
Timothy P. Noonan, Esq.HODGSON RUSS LLP
Twitter: @NoonanNotes
Contact Information
State Resident Tax Creditsafter the Wynne Decision
A CCH Seminar
Trust Income at the State Level: The Significance of State
Residency for Trust Fiduciary Income Tax Purposes
Monday, June 22, 2015
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